Labor Market Data Revisions Look Encouraging

The case for seeing a new recession on the horizon for the U.S. looks a bit less compelling these days in the wake of moderately stronger economic reports, but some analysts remain unconvinced that growth will prevail. On the front line of this debate is the Conference Board’s leading indicator, which paints a relatively encouraging cyclical outlook, based on its latest monthly update. In the opposing camp is the Economic Cycle Research Institute, which continues to stand by its September 30 forecast that the U.S. is destined for a new downturn. The latest update to ECRI’s weekly leading indicator slipped again for the week through November 25, which leaves it roughly unchanged since the end of September.

Perhaps the strongest statistical evidence for doubting ECRI’s recession call is the labor market. Private nonfarm payrolls continue to rise, which implies that the odds of a new recession are low. The last full month of economic data (October) is also encouraging. Still, there’s lots of uncertainty in a world brimming with trouble and so confidence is low that today’s modest growth will prevail.
In the current climate, the search for additional clues knows no bounds. If it turns out that the cycle is tipping over to the dark side, there’s a case for thinking that we’ll see some evidence in the labor market sooner or later. Later today we’ll learn of the latest data point for weekly initial jobless claims, one of the more reliable leading indicators. For now, consider how revisions to this indicator, along with nonfarm payrolls, compare in recent history.
First, some context. Most economic reports are revised one or more times after the initial release. An economy that’s strengthening, or at least holding its own, is likely to see bullish revisions. Meanwhile, if the economy is weakening or in recession, the revisions are likely to reflect a weakening trend. With that in mind, let’s consider how revisions compare for two measures of the labor market.
First up is private nonfarm payrolls. As the chart below shows, the trend seems to be our friend. The net change in monthly revisions, based on the current revision less the initially reported number through time, has been consistently positive since May. For the first time since the recession was formally declared at an end as of June 2009, revisions have been positive on a sustained basis. The positive revisions are still relative low by historical standards, but if this trend persists—and strengthens—it provides the optimists with one more reason to think positively.

The vintage data for weekly claims maintained by the St. Louis Fed only goes back to 2009, but the limited history for revisions is starting to look encouraging here as well. Since we’re talking about new filings for unemployment benefits, downward revisions are a sign of improvement vs. the upward revisions we’re looking for with payrolls. The good news is that weekly claims revisions appear set to dip below zero for the first time in nearly a year.

Revisions alone don’t tell you much about the business cycle. But in context with a broader review of indicators, there’s still a case for anticipating continued growth in the economy.